The Full Bar - all my pages

Thursday, January 7, 2016

Craft Beer: Big Enough To Fail

American
brewers are ringing the tocsin again: Big Beer is on the march!
Mainstream beer has taken some heavy hits on sales in the past eight
years as regional and small brewers’ share of the market climbed to
over 10%. True to the expected storyline, The Empire is striking
back: more consolidation at the top to increase their monopoly power
and cut costs; more pressure on wholesalers to drop other brands;
more brewing of beers that are not light lagers; and the outright
purchase of key regional brewers.

Should
Craft Beer Nation tremble in fear? Before you answer, consider
this: none of this is new. These are the same tactics Big Beer
has been working for almost 20 years. More of the world’s brewing
capacity is concentrated in the control of fewer companies.
Anheuser-Busch’s “100% Share of Mind” program from 1998 was
aimed at compelling A-B wholesalers to drop non-Bud family beers by
leveraging discounts and supply of those Bud products. Coors has been
brewing Blue Moon since 1995, about the same time Anheuser-Busch
tried a series of beers in a wide variety — porter, pale ale, IPA,
stout — and Miller tried the Miller Reserve line. And purchases of
regional and small brewers date back to about the same time, when
Miller bought Celis and Leinenkugel outright, along with a 50%
interest in Shipyard (which was later bought back), and
Anheuser-Busch bought a share of Redhook, Widmer, and Kona.

Gather round, boys, it's beer!

And
none of it worked.As the big brewers arrayed these strategies
against what was then a much smaller threat (craft beer had a little
over 3% of the market, while imported light lagers like Corona and
Heineken had well over 10% and were growing steadily), none of it
worked. Though the rise of smaller breweries was slowed for a bit,
there were also the factors of an overeager business climate, a lack
of skilled brewers and packagers to make good quality beer, a lack of
capital for facilities investment, and a young industry that was
easily divided against themselves, the one tactic employed by Big
Beer that was, arguably, effective (several lawsuits, egged on by Big
Beer, pitted small brewers against one another).

Eventually
the tactics proved to be wholly ineffective in the face of the rich
variety of craft beers. Sales exploded and 100% Share of Mind was
forgotten as wholesalers scrambled to defy A-B and scoop up profits,
and while Blue Moon joined in the growth, it was hardly a category
killer. Almost every bar in American serves non-mainstream beer —
to the point where “mainstream” is less useful a term to define
beers — and the “pull” of consumers for these beers have
brought them into markets large and small. It would seem that these
alternative beers have won.

But
the alarm is being sounded again, as the Mega-Merger looms: ABInBev
swallowing SABMiller. ABIB threatens more wholesaler pressure, and is
angling to outright buy major wholesalers, making control complete
(still think you want to see the break-up of the three tier system?).
Goose Island cranks out more new beers, Shock Top and Blue Moon
develop more varieties. Purchase of regional brewers is accelerating:
Elysian, Four Peaks, Lagunitas, Firestone-Walker, Breckenridge,
Ballast Point, and we’re told by the true believers that these
breweries are “craft” no longer, though the beers haven’t
changed.

Now
the warning is that true craft beers will be throttled, denied
a chance at the market because of the coercive power of the
mega-megabrewer, lost in the forest of “crafty” big brewer-made
beers, denied sales of raw materials.

Is
concern warranted? Surprise! In a switch of how I used to think, I
now believe there is a real threat, but not because of these
developments. The alternative brewers' beers are still wanted, and
the market will find them, if new wholesalers have to be created to
move them, or state laws changed to provide them a path. The
continued mad success and technological innovation of Goose Island’s
Bourbon County shows that “craft” or not, beers continue to be
made well by the same breweries, so they're probably not going to dilute or
pollute the craft “brand.”

What’s
the issue then? Size. Small brewers are finally big enough to fail.

When
these brewers were still truly “micro,” big beer couldn't figure
out what to do...because the numbers were too small.
There wasn't a critical mass, there wasn't a brewery big enough to
buy that was willing to be bought, their own beers couldn't catch
enough drinkers to ignite, there just weren't enough barrels of this
new kind of beer being sold for it to be worth them making it. It's
actually kind of funny that they couldn't figure that out.

But
now the numbers have reached the point where the big brewers can
reach out and buy established regional brewers who have a real chunk
of the market. As more and more brewers hit 50,000 barrels of annual
sales, they become attractive to the big brewers, who don't have to
create a local brand; they can just whip out their checkbook and
become the largest local
brand. Because no matter how much sales of light lager have declined,
they're still HUGE, and that means these guys can bring an avalanche
of cash to bear.

Craft
beer has become big enough to be interesting, big enough to buy, big
enough that it has enough fans who don't really know who owns it, big
enough that the market share justifies the cash. We're going to see
more of these, and if MolsonCoors is smart, they'll get in the act,
and maybe Heineken should consider more purchases.

What
happens then? Maybe the mass of customers loses faith in craft beer,
when they learn that many of the familiar names are no longer
independent. Maybe the word gets out and people are outraged and stop
buying the bought brands; but do they buy independent beers, or do
they buy wine, or whiskey? Maybe brewers like Sierra Nevada, and
Boston Beer, and Yuengling, and Deschutes refuse to sell; hell, maybe
the Department of Justice wakes up and says “No!” to some of
these mergers as monopolistic. Maybe there are enough new breweries –
over 4,000 now – that choices can still be made by the informed
consumer, and more consumers get informed, and everything's okay.

Maybe,
maybe, maybe...but definitely this: no one knows. This is market
dynamite.

What
should you do? Decide what's important to you. Decide what you want
your local market to look like. Decide if you'd rather have a steady,
fresh supply of a few brands, or a dicey choice of small local guys
who may or may not make what you want, which is going to depend on
what your local guys
are like. It's your call.

Me?
I'm always in favor of drinking beer that tastes good.
If big market beer tastes good, I'm going to buy it, and drink it.
But even so, 4 times out of 5, I'm drinking something local and
independent.

That's a lesson I learned 30 years ago when I was
staying at a friend's house in Utica, New York and the nightly news
said the local AHL franchise had given an exclusive beer contract to
A-B. In Utica. Where Matt's was still clinging to life, where guys
still punched in to make local beer. Bullshit to that, much-younger-me said, and we
went out to the bar around the corner and drank local all night long.

Make
your choice. Just remember how we got to where we are, and what we
had to go through to get there. It's just beer, but...it's beer.*I know I said I was going to do a post on Canadian whisky, but...I put that off for a while and gave you this instead. The Canadian piece is coming, but it's going to be a while.

7 comments:

I'm not so sure. I keep hearing this fear from the small brewers, but I keep seeing their beers on the shelves. I think Alan Macleod may be closer in that the real threat to small brewers is the much bigger small brewers, who have the variety and the cachet to appeal to craft drinkers, and the size to appeal to chain buyers. Still, as I said, I keep hearing this...but I don't see it. Yet.

Good read. Be interested to know what percentage is of the niche within in the niche that cares about being informed consumers (at least on the topic of their beer). Assuming it's rather small, the big, controlling guys won't have much room to care provided they're putting out the same quality product that its consumer base loved pre-acquisition. If I were to make a prediction, we max out in the 4,800 range of breweries in the next 2-3 years before falling back to around 3,000-ish in the next 5 years. (I should probably write my own article based around that prediction, rather than bury it in your comments, right?!)

I can only speak somewhat intelligently on Chicago-area Illinois and Vermont. From a distributor standpoint, Chicago has distributors that focus on what generally has been known as craft beer. Some remain independent, some have been bought by Miller-tied larger distributors -- who have left them intact as subsidiaries because they're so profitable. For AB/InBev to truly try to implement the "only carry our beers" plan through incentives -- well, they'll have to be rrreeeallly big incentives to make up the difference. For Vermont, its economy is big on locally-produced products and tourism, which will keep small brewers going strong.

I guess I do wonder if there will be a shakeout now that Chicago's non-brewpub breweries keep multiplying -- forget about telling the players apart without a scorecard -- we're a few steps beyond that. But I don't see a shakeout going from, say, 50 to 15 -- it's more like 50 down to 40. At the small level, where you just need to find and maintain a local presence, the pressure to grow beyond a certain size is lessened. What i find is more and more regionals arrive... and people don't care. Alesmith arrived last year, to crickets.

Bryan, it's GOT to be a fairly small niche, I've seen nothing to convince me otherwise in 30 years. As for your prediction...we're at 4400 now and no sign of letting up on the throttle. I'm betting we get closer to 6,000 before we fall back.

I also think Bill has it right and I think it's because the laws around brewing and selling beer have loosened enough that there's no way the little guys can get stomped out by the big guys anymore. Regulatory capture is gone. It's easy enough for anyone to open a brew pub to get started. As long as the quality is there, people will buy it. And there are always going to be the people who want to get into the business, so as long as the laws allow it to be cheap/easy enough, then for every craft outfit that gets big and bought up, somebody else is there to take their place.

It might become similar to the tech industry now, where entrepreneurs create start-ups for the express purpose of making them attractive to a big company who will then buy them.

I like your article, and I don't know much your area of the country, but I live in Massachusetts and it seems like craft beer breweries are everywhere. But the concern becomes whether these small brewers are being compromised by the larger A-B's of the world.

Seeing Through the Glass

Follow STAG on Facebook

The Guy Pouring The Glass...

All opinions expressed on this blog are strictly my own; they do not reflect those of the publications for which I write.
I've been a full-time drinks writer since 1996. My first whiskey book, "Tasting Whiskey," came out in October 2014. I am the author of four regional brewery guidebooks. Next time you see me at a bar or event or distillery, say hi.